How to Balance Risk Management for Investment Portfolios

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Setting up an Investment Portfolio

When first starting at the very beginning, investing can seem like quite a daunting prospect. Stocks, bonds, dividends, options, securities, what does it all mean? When unsure of how to tackle this, the best bet is to talk to a financial advisor. They will set up an investment portfolio, which is comprised of all the things listed above, and more.

Typically a financial advisor will manage the portfolio and send a statement of the activity regularly. However, it is a good idea to be aware of what exactly is going on, and how to work with the advisor to manage the financial risk in your portfolio.

  1. Don’t put all your eggs in one basket

Keeping a portfolio as diversified as possible is a good strategy. If the portfolio has a small share in a lot of different stocks, the chance that all of them decreasing in value is slim. In comparison, investing all the money into one particular company, and then having it go bankrupt would be financially devastating. The same thing is true for types of financial assets. For example, someone could invest in stocks, bonds and mortgage-backed securities. This would be providing a lot of alternative forms of profit.

  1. Consider dividend stocks

Investing in dividends is a fairly safe option for people just starting out. By identifying a stable company that pays its shareholders a regular dividend income, the portfolio will have a little bit of cushioning. Many retirement portfolios contain a large number of dividend stocks, as these are regular income that can be relied on fairly consistently. Keeping an eye on the company’s regular business dealings and reading about them in the news is a good way to stay aware of their general stock price.

  1. Bonds vs. Stocks

A bond is an agreement between two parties, typically the government or corporations. These bonds are sold to investors. When the bonds reach their maturity date, the money needs to be exchanged between the parties, plus a little extra to the investor. Bonds are considered more stable than stocks, because they are not as volatile. If a sudden situation causes the stock market to crash, the investor will still hold that bond, which the issuer will still have to pay at the maturity date. There is still a risk of default, but it is much lower than if the money was invested in stocks.

  1. Understand your investments

To quote billionaire Warren Buffet; “never invest in anything you don’t understand.” This will always be true, especially when just starting out. Even if a financial advisor is encouraging a certain transaction, it is important that the owner of the portfolio understands the risks and rewards. If they are not aware of the company, or that particular type of business, it can be very difficult to critically assess what they are getting into. This can result in losing a great deal of money, which could have been invested in something that they are more familiar with.

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